Question

What is the characteristic of a zero coupon Treasury bond?

1) Provides fixed growth for a specific time, not for income
2) Pays par at maturity
3) Provides regular income payments
4) Has a variable interest rate

Answer 1

A zero coupon Treasury bond does not pay regular interest payments or coupons over its lifetime. Instead, it is sold at a discount to its face value and provides a fixed growth for a specific time, such as 10 years. This characteristic distinguishes it from other types of bonds that provide regular income payments and have a variable interest rate.

Step-by-step explanation:

A zero coupon Treasury bond is a type of bond that does not pay regular interest payments or coupons over its lifetime. Instead, it is sold at a discount to its face value and provides a fixed growth for a specific time. For example, if a zero coupon Treasury bond has a face value of $1,000 and a maturity date of 10 years, it may be sold for $600 and at the end of the 10 years, the investor will receive $1,000.

This characteristic distinguishes it from other types of bonds that provide regular income payments and have a variable interest rate. Zero coupon Treasury bonds are considered low-risk investments because they are backed by the U.S. government and provide a guaranteed return at maturity.

It should be noted that while zero coupon Treasury bonds do not provide regular income, they can still be a valuable investment tool for long-term financial planning or as part of a diversified investment portfolio.